Demographics Threaten China Property Collapse

THE persistent weakness in China’s petrochemicals markets had mainly been caused by problems in the country’s property sector, according to many delegates on the sidelines of last week’s Asia Petrochemical Industry Conference (APIC) in Pattaya, Thailand.

Here are some worrying numbers that help to explain this view:

China’s real-estate sales declined by 5.2%, new construction fell by 25% and unsold completed properties rose 23% year-on-year in Q1 2014, according to China’s National Bureau of Statistics.

Earlier this month, Mao Daqing, the vice-president of China’s largest property developer Vanke, was widely quoted as having estimated that house production per 1,000 people had reached 35 in China in 2011.

The figure was below 12 in most developed economies and hadn’t risen above 14 at the height of the Japanese and South Korean property bubbles, he added.

“By 2011, housing production per 1,000 people reached 30 in Tier 2 cities, excluding the construction of affordable houses. A persistently high figure such as this should cause alarm,” said Mao in a leaked transcript of a speech that was supposed to remain private.

Why is property so important for petrochemicals? Because the real estate sector accounted for some 23% of GDP last year, according to Moody’s Analytics.

And given still-low income levels in China, the “wealth effect” of the property boom has probably played in even-bigger role in boosting growth. This, of course, includes the rapid rise in consumption of all the things made from petrochemicals.

Some delegates were still clinging on to the hope that the central government would blink by loosening monetary policy in order to encourage more borrowing. This was despite last week’s editorial in the government-owned China Daily, which once again pointed firmly in the opposite direction. This followed Xi Jinping’s insistence that there would be no major U-turn on economic reforms.

But the delegates said that there were already tangible indications that the property market would stabilise, thanks to the easing of restrictions on real-estate sales that have been introduced by several local governments.

But what if demographics mean that no matter what policy fudges take place, there is nothing that China can do to prevent a property collapse?

Mao, in the same speech last month, also said that the rapid ageing of China’s population meant that workers would have less and less money to spend on property, as they would need to devote an ever-greater share of their incomes on retirees. Over the next 20 years, the ratio of workers to retirees will fall from around 5:1 to 2:1, according to the Brookings-Tsinghua Centre.

China’s birth rate peaked in 1987, and since people marry approximately 25 years later, that means demand for “new household formation” homes maxed out in 2012, according to equity research firm, JL Warren.

“This implies that things could get a lot worse as the bubble pops. With credit cheap and abundant, developers have been pumping out new housing like there’s no tomorrow,” said this article in the investment news service. Quartz.

“And since homes take on average 2.5 years to complete, developers will pile on excess supply for two to three years to come. But they’ll need to sell those homes to repay loans. That means they’ll have to slash prices, scaring off speculative buyers, which JL Warren assumes make up around 15% of commercial purchases, compounding the collapse,” added the same article.

“If that’s what’s behind the current glut of housing supply, it also means there’s not much the government can do to prevent the next three years from turning very ugly indeed.”